AMT: Little Tax of Horrors

It is for this reason that not everyone thinks the AMT should be completely repealed. "It's not that we're in favor of the AMT," says Bixby of the Concord Coalition. "But if they do repeal it, they should find some other source to pay for that income."

The government's current modus operandi concerning the AMT has been to slap on an emergency patch each year to prevent it from affecting millions of additional tax payers.

"Congress has been adjusting things one year at a time but not making it permanent," says Bixby. "The sane thing to do would be to negotiate some sort of reform instead of having to scramble every year to get a new bill. What we are doing now makes no sense at all. ... It's just a politically convenient thing to do."

In a February report to Congress, the CBO pointed out ways in which lawmakers could permanently lower the number of people subjected to the AMT. One way, it says, would be to make the exemption amounts as dictated by the Tax Increase Prevention and Reconciliation Act of 2005.

"Under that approach," the report says, "6.2 million taxpayers would be affected by the AMT in 2010 -- rather than the 30 million under current law."

Another option the report cited would be to allow people to take the standard deduction, personal exemptions and the deduction for state and local taxes when computing tax liability under the AMT. This would reduce the number of people affected by the AMT to 2.8 million in 2010.

Location, Location, Location

How much you earn and how many children you have are not the only factors affecting whether you owe the AMT. Where you live plays a big part as well. New Jersey, New York and Connecticut have the highest percentage of taxpayers who are required to pay the AMT. Below is a map showing each state's percentage of tax returns (in which there is a liability) that were affected by the AMT in 2003.

Percentage of Tax Returns With Positive Tax Liability Affected by the AMT (2003)

Source: The Tax Foundation

Next in the tax series: America Gives the IRS a $2.2 Billion Tip.

TheStreet.com series previously featured:

• Don't You Miss a Tax Credit or Deduction
• Booyah Breakdown: Taxes for Traders
• How to Choose the Right Tax Software

>To order reprints of this article, click here: Reprints